Software Industry Benchmarks

Too many entrepreneurs set out to build businesses without understanding the fundamental financial structure of other companies in their industry. This is understandable given that most entrepreneurs don’t have a background in finance. (After all, if you’re good in finance you’ll probably start a finance firm, not a software company.)

The role of benchmarking is to understand how your results and plans compare with actual experiences of other companies in your industry. I’ve created benchmarking tools for several years and have always been very impressed at how useful they are in evaluating businesses. The following snippets show statistics from our most recent benchmarks for the software industry.

What to look for in benchmarks

If you’re running a business that you hope will be high growth, there are certain key software industry benchmarks you really need to look at when you’re comparing your results to the rest of the industry. These are:

Revenue Growth

Understanding how companies are able to grow will ensure that you don’t create plans to grow at an unsustainable rate. For instance did you know that very very few software companies ever grow at more than 100% a year? The very best manage to grow consistently at 75% to 100% a year, not more and take ten years to reach $100 million. Check out our infographic on the subject.

Capital Required

Many entrepreneurs underestimate the amount of capital that is required to grow quickly. The best companies actually raise equity equal to two times revenue until they are at $25 million and finance requirements taper off to a one-dollar capital to one-dollar revenue basis when they are at $100 million. Another infographic perhaps?

Spending on Sales and Marketing

The reason you need so much capital is for spending on sales and marketing. You will consume buckets of it while you’re growing. In fact, you’ll need to spend as much on sales and marketing the minute you start up as you spend on research and development. When you actually have product in market you’ll need to spend twice as much on sales and marketing as you do on R&D. There is an online calculator you can see at Apreste Media if you want an interactive tool to calculate benchmarks. Or for another infographic: